Bonds settle at weaker levels as Treasury moves to finance budget deficit
Local bonds have weakened as the Treasury plans to up its bonds sales by R450m this week, in order to plug a growing hole in the fiscus
SA's rising budget deficit further diminished appetite for South African government bonds this week, with local bonds consolidating at their weakest level in 11-months on Thursday morning.
At 10am, the yield on the benchmark R186 government bond maturing in 2026 had risen to 9.36%, roughly the level it had traded at shortly before the ANC's elective conference in December 2017.
Weakness in bonds has been partially prompted by news that the Treasury will increase the size of the bond auction by R450m in November, adding to other factors putting pressure on the market, such as the increased risk of a sovereign credit-ratings downgrade. Local bonds may now be oversold, analysts said.
Tuesday's weekly government bond auction attracted bids of only R4.17bn, compared to R12.69bn a week before. Local investors were seemingly on the sidelines, analysts said, amid thin liquidity on global markets and risk-off sentiment.
The Treasury had said last week that it was running R5bn behind schedule in terms of meeting its financing requirements, and markets were expecting an additional R300m to R350m in issuance from November, said Nedbank Corporate and Investment Banking analyst Reezwana Sumad. The Treasury indicated on Wednesday that this would now increase by R450m next week, implying an addition R9bn in issuance this financial year. R2.4bn in bonds were sold on Tuesday.
There was still the prospect of additional fiscal slippage, if economic growth surprised to the downside, and the increased issuance was appropriate, said Sumad.
"We still believe that local bond yields at currency levels look fairly attractive, and without pricing in any significant deterioration in credit risk in the near term, our fair value suggests that the R186 benchmark yield is at least 50 basis points undervalued," she said.
Emerging-market assets in general have been under severe pressure in 2018, with foreign investors paring their positions in South African bonds to the tune of R51bn at the end of the day on Friday, according to JSE market statistics. Over the same period in 2017, investors had bought R64bn in SA bonds.
The US-China trade war, tightening monetary policy by the world's major central banks, as well as local risks have all put local bonds under pressure in 2018.
The increased bond supply should continue to adversely affect bonds in the short term, particularly ahead of ratings reviews, unless revenue collections improve, or switch auctions continue to reduce redemptions, Sasfin Wealth fixed-income trader Alvin Chawasema said.
The Treasury said it did not consider the auction as an outlier, and conclusions could not be drawn about general interest or demand for government debt on any one or two auctions.
"Our market sounding revealed that the drop in bid-to-cover for Tuesday's auction may be attributed to global risk-off sentiment, which was negative for emerging markets," Treasury said